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Mark Humphrey
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I am an investor. I've written in years past about the investment implications of economic events, properly understood from the perspective of Austrian School thinking. Recently, I have revised my ideas somewhat. Today, I refer to the ideas I hold to in economics as... More
  • Chinese "Rebalancing" Toward Consumption Guarantees Poorer Chinese 0 comments
    Dec 23, 2013 6:33 PM

    The big buzz about China these days is the alleged need for the state to "rebalance" its economy. Instead of directing its hundreds of millions of businesses to produce for export, it must redirect many of them to produce for local consumption. Orthodox economists declare that this is the proper pathway for state planning for China for years to come.

    But there is a basic problem with this recommendation. It will make the average Chinese poorer, even as it imposes more restrictions on their freedom to work and prosper. State economic planning causes poverty, not prosperity.

    Today, China's economy is substantially mercantilist. The state subsidizes companies to produce for export in a myriad of ways. Mercantilism is a classic type of government economic planning that holds people are better off if they can ship the goods they produce to some other country and get money in exchange. However, paying for subsidies to make goods cheaper for export also makes those goods scarcer and more expensive at home. Scarcer more expensive goods make people poorer, not richer.

    Without coercive intrusions by various Chinese governments into the market place, today's Chinese mercantilism would not exist.

    Now the Chinese economy, burdened with all sorts of insane subsidies and other forms of government corruption, is slowing and sputtering. Orthodox Keynesians have therefore devised a New Economic Plan that promises a Bright Tomorrow: The state must "rebalance" the economy, away from exports and toward consumption.

    To Keynesians, "consumption" is the magic wand of prosperity. More consumption is thought to grow production, and thereby raise employment and incomes. When production increases for consumption, capital investment supposedly also rises in tandem. Thus we have the Miracle of Keynesian Economics: The more people gratify their wishes by shopping and splurging, the wealthier and more secure they'll become!

    But this is economic ignorance. In fact, the key to economic progress is not consumption, but production. Consumption is not possible without prior production. Production requires investment in capital goods and investment in payrolls. Without such prior investment, production cannot take place. For without prior investment, the means of production DO NOT EXIST.

    Investing in real goods for the purpose of producing something requires saving from income. Investing in payrolls for the purpose of making something requires that the business person defer consuming to save money to pay workers. In short, the more people consume, the less they save and the less they can invest in the means of production.

    Keynesians argue that no one needs to save, because government can spend more and print lots of new money. But someone must produce the real goods for government workers to consume. Someone must produce actual goods for which newly printed money can be exchanged. All production requires investment in capital goods and labor. So we're back to square one: The key to economic progress is production, not consumption.

    Keynesian sponsored intrusions will only impoverish the Chinese people, and any others who embrace their ideas. What the Chinese need is not a New Economic Program, but radically reduced government power and free markets. They need the freedom to produce and create, and to innovate and compete, without begging and bargaining for permission from some corrupt Mandarin. They need the freedom to keep what they earn. They need the freedom to live.

    If state "planning" could cause prosperity, then the Soviet Union would truly have been a Worker's Paradise. If wise state "planners" could decree the proper pathway, then Cuba would be Tropical Utopia. If the state taking over peoples' lives were the path to prosperity, North Koreans would be flourishing, not starving. Ludwig von Mises poignantly described state economic planning as "Planned Chaos".

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